Worried about the deficit? Improve corporate tax conduct and wealth transparency

A central argument forwarded by those in Congress who oppose President Biden’s $1.9 trillion COVID-19 relief plan is that it would balloon the deficit. “We cannot simply throw massive spending at this with no accountability to the current and future American taxpayer,” Sen. Rick Scott (R-Fla.) recently told The Washington Post.

Indeed, the emergency spending being asked of Congress nearly one year into the pandemic will need to be covered by taxpayers. But the notion that it will have to be middle class families or small businesses who carry that burden is wrong. Instead, the Biden administration should make it clear that improving accountability on existing taxes for the wealthiest individuals and corporations would go a long way toward funding the programs struggling Americans need.

As was illustrated last year by The New York Times’ reporting on how President Trump spent years exploiting tax laws to avoid paying his fair share, our current tax system in the U.S., like others around the world, is designed to allow the richest, most powerful people to avoid paying their dues to society. The rapidly widening gap between the rich and poor in America and around the world is in part due to governments that are unwilling or unable to hold their richest citizens accountable.

Without international cooperation to directly confront widespread tax avoidance, we’re going to start seeing more of the deleterious and often violent consequences of unsustainable inequality that are already evident. As part of the Biden administration’s broader efforts to rebalance the economy and re-establish the credibility of U.S. leadership on the global stage, they should embrace the opportunity to play a leadership role in moving that cooperation forward.

The biggest problem we face is that so much of the unfairness in taxation is perfectly legal. There are many completely legal ways for the rich to avoid paying any taxes. One of the biggest issues is that large multinational companies can propagate a legal fiction that all of their profits are earned in another country and therefore shouldn’t be taxed by the country where they really create value. So they can get away with paying much lower taxes than companies operating within one country, and sometimes almost no tax at all.

The full magnitude of the problem is unknown because of entrenched financial secrecy. The use of ‘offshore’ structures allows the real ownership, location and very existence of wealth to remain hidden, in turn creating fertile ground for tax evasion and avoidance. The rise of transfer mispricing, profit-shifting and a race to the bottom for statutory tax rates have ended the century-old consensus that once dominated international corporation tax law.

At the UN75 Global Governance Forum last year, a coalition of groups brought together by the German non-profit Friedrich-Ebert-Stiftung (FES) outlined how higher global tax standards and greater wealth transparency are needed to combat these problems. Rules that require companies to disclose revenue, profit, subsidiaries, tax payments and employee investment in each country in which they operate should be mandatory. Businesses should also be required to disclose their beneficial owners and persons of significant control over shares or voting rights.

These changes would enable lawmakers to more accurately assess if the company is acting reasonably or not and legislate accordingly. Voluntary efforts to raise corporate tax standards — like the one led by Fair Tax Mark in the United Kingdom — are a step in the right direction. But these measures should be compulsory for all companies.

The need for greater transparency extends to high net worth individuals as well. To that end, a Global Asset Registry, as advocated by The Independent Commission for the Reform of International Corporate Taxation (ICRICT), would link the existing data provided by recent tax transparency measures and provide missing data – such as information on hard assets, liquid assets and ownership vehicles like trusts. This would allow wealth inequality to be better measured, facilitating more informed public discussions and appropriate taxation.

Getting companies and wealthy individuals that are already inclined to be good global citizens to pay their fair share is not enough, because profit incentives work the other way. The ones to focus on are those that won’t do so voluntarily. Starbucks learned the hard way that selling lots of coffee in the U.K while claiming to earn no profits created reputational risk. But there are plenty of companies, like Koch Industries, and wealthy individuals, like Donald Trump, that may not care about their reputations.

The relief plan being debated in Congress is likely to make it through thanks to budget reconciliation. But for the sake of deficits and more importantly for the sake of economic sustainability in the U.S. and around the world, the Biden administration should make it a priority to establish fair rules that prevent both tax evasion and avoidance, and have the same rules apply to everyone.

Morris Pearl is chair of Patriotic Millionaires and former BlackRock Managing Director.